By Ashwin Manikandan
MUMBAI, – India’s central bank on Wednesday proposed to ease banks‘ capital adequacy norms by waiving the requirement for lenders to maintain an investment fluctuation reserve.
The reserve was introduced in FY19 to help banks hedge against depreciation in the value of their investments.
“In view of the developments in prudential framework over the years, it is proposed to dispense…IFR as an additional buffer,” Reserve Bank of India Governor Sanjay Malhotra said in his monetary policy address in Mumbai.
Banks can now treat the outstanding balance in the reserve as Tier 1 capital that can be transferred to the statutory reserve, general reserve, or balance of profit & loss account, the RBI said in a notification on Wednesday.
Tier 1 capital is the highest-quality capital of a bank, which includes equity, retained earnings, and certain instruments that can absorb losses.
The RBI also proposed to relax norms for banks to calculate the capital-to-risk-weighted assets ratio using quarterly earnings, instead of annual.
The ratio is a key financial metric to measure banks’ capital strength against their risk-weighted assets that account for bad loans.
As per the current rules, banks can only use quarterly profits for capital strength calculations if the earnings are audited and all bad loan provisions are recognized.
(Reporting by Ashwin Manikandan and Gopika Gopakumar; Editing by Mrigank Dhaniwala and Shinjini Ganguli)
